Ringgit Rises to Seven-Week High as Najib Keeps Deficit Target

  • PM cuts 2016 GDP growth estimate to 4-4.5% from as much as 5%
  • Lowers pension contributions to shore up economy hit by oil

The ringgit rose to a seven-week high after Malaysian Prime Minister Najib Razak maintained his fiscal-deficit target and announced measures to shore up an economy hit by a plunge in oil.

Najib’s 2016 budget revisions include cutting employee state pension contributions and giving tax exemptions for certain groups of workers. He also stuck with a controversial goods and services tax introduced last year that’s brought in additional revenue. The currency climbed for a fifth day in the longest stretch since September as sentiment improved after Brent crude bounced above $30 a barrel from a 2003 low. The government’s oil assumption price was revised to $30-$35 from $48.

“The cut in the employee contribution rate will support domestic demand and growth,” said Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “Keeping the budget deficit at 3.1 percent of gross domestic product is a positive surprise to the market and for the currency.”

The ringgit led gains in emerging markets and consolidated this week’s advance beyond its 100-day moving average, a bullish signal for the currency. It fell 19 percent last year in Asia’s worst performance as a slump in Brent cut government revenue and a political scandal involving Najib spooked investors.

The currency strengthened 1.2 percent to 4.2070 a dollar in Kuala Lumpur and reached 4.2005, the highest since Dec. 7, prices from local banks compiled by Bloomberg show. It will decline to 4.41 by year-end, according to the median estimate of analysts in a Bloomberg survey. That would represent a 4.6 percent drop based on the current rate.

Growth Cut

Bank Negara Malaysia Governor Zeti Akhtar Aziz said on Thursday that the central bank isn’t targeting any specific level for the ringgit, while Najib reiterated the currency is undervalued and doesn’t reflect economic fundamentals.

The prime minister lowered the 2016 growth forecast to 4 percent to 4.5 percent, from as much as 5 percent, and said he’s confident the economy expanded 5 percent last year and the budget-deficit reduction target was met at 3.2 percent.

There’s no impact on the sovereign’s credit rating from the budget revisions, which show the government won’t depart from its fiscal consolidation plans, according to a statement from Standard & Poor’s.

Ten-year sovereign bonds rose, pushing the yield down three basis points to 3.87 percent, the lowest since May, according to prices from Bursa Malaysia. The yield on notes due in 2020 climbed two basis points to 3.38 percent.

“Oil weighs on the budget, but a lot of this is already priced in,” said Trinh Nguyen, a Hong Kong-based senior economist for emerging Asia at Natixis SA. “It is good news from the point of view that they are addressing the issue of the budget.”

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